The ins and outs of putting away for loved ones’ college expenses is no easy study

For the past five years, Gerald and Marjorie Good have been contributing thousands of dollars a year to help many of their grandchildren through college.

As the Goods see it, the primary benefits are obvious: quality educations and less debt for the grandchildren.

The side benefits are also attractive: the Goods used 529 college saving accounts, which do not tax investment gains; and their contributions are not counted as part of their overall wealth for estate-tax purposes.

Advertisement - Continue Reading Below

“I thought it was the right thing to do,” said Gerald Good Sr., former owner of a Ford dealership in Randolph. “It’s tough for people to pay for college these days and we wanted to help.”

Noble intentions aside, contributing to the younger generations of the family poses a number of challenges. Donors can face a minefield of tax restrictions and penalties and may also affect how much financial aid their family members receive if the contributions are not structured correctly.

“College-saving plans can get pretty complicated,” said Catherine Valega, a financial planner and owner of Green Bridge Wealth Management LLC in Winchester. “I tell people thinking of starting a college-saving plan, ‘Don’t listen to what your neighbors says. Get advice.’ ”

The simplest way to help is, believe it or not, just writing a check. Under US tax law, individuals can directly write checks for any amount to a qualified higher-education institution to cover a student’s tuition balance and, better yet, the money will not be considered income to the student or count against a donor’s lift-time gift tax, said John Napolitano, founder and chief executive of US Wealth Management LLC of Braintree. The funds must be used for tuition, not room-and-board and textbook expenses.

A variation of this is waiting until the student graduates and then helping him or her pay off loan debt. Such direct contributions can be part of the $14,000 in annual gifts that are not taxed by the IRS.

Though Napolitano said direct contributions are becoming more common, 529 college savings plans remain the most popular way for parents and grandparents to save up for their kids’ college expenses.

There are two types of 529 plans. A pre-paid plan allows donors to purchase tuition credits at today’s rates that students can redeem toward to future college bills. The pre-paid plans are set up by state agencies — the Massachusetts Educational Financing Authority, for example — and usually administered by private companies, such as mutual-fund firms.

The second, and more common, option allows donors to set up individual investment accounts where the gains over the years are not taxed so long as the money is used for the beneficiaries’ college expenses.

Fidelity Investments currently manages about $13 billion in 529 saving-plan assets, as much as 15 percent of which are directly controlled by grandparents, said Keith Bernhardt, Fidelity vice president of college planning.

“It’s become a fairly common thing for grandparents to do,” Bernhardt said.

A big tax advantage of both 529 plans: Contributions can be made outside the lifetime gift-tax exemption of $5.25 million, thus minimizing potential estate tax hits down the road. Donors can also take advantage of the annual $14,000 gift-tax exemption to make annual contributions into 529s.

But family members should know 529 plans may affect how much financial aid the student receives, as the assets can be counted as potential sources to pay for college tuition and other expenses. One way for grandparents to minimize such complications is to establish their their own separate 529s, rather than contributing to those set up by the students’ parents; colleges usually don’t ask about grandparents’ accounts on financial-aid applications and there is no legal requirement to disclose them until the money is distributed.

A separate issue donors should consider is whether they may end up needing the money in 529 plans for their own use — such as for nursing home care. If that happens, the investment gains are subject to normal income taxes, and withdrawals are assessed a 10 percent penalty.

Trusts are another mechanism for college savings, but must be carefully written to avoid various problems, said Christopher Griffith, a financial planner at the UBS-Griffith Wheelwright Group in Rockland.

One potential area of trouble is that, if not worded carefully, the money set aside for college could end up being used for any purpose once a beneficiary is old enough to control a trust’s assets, he said.

“If a trust isn’t done right, as a grandparent, you can’t stop them from going out and buying a new car instead of using it for college,” said Griffith.

With the help of a financial adviser, Gerald Good, 80, and his wife selected 529 accounts because of their favorable tax status.

“I see no negatives to it,” Gerald Good said. “I’ve got a certain amount of dollars out there that I can give and they’re going to get it for their education. It’s so worthwhile.”